How it started

An owner of a dairy distributor came to me with a question. The market was tough, and many companies were in losses. He had a chance to acquire a company from the same market, four times bigger than his own business: 800 people against his 200. The problem was that he had the resources to pay only 20% of the price needed to get control over the other company. His ability to raise more capital for the deal was very limited, and he wanted to reduce his risk before jumping in.

The only thing he could do, and asked me to do, was to take the company's reporting, understand what could be improved and on what timeline, and at least make sure he wasn't buying an asset that would generate losses for him.

I got access to the P&Ls and the balance sheet, a hardly responsive executive team that was afraid of any changes, and a limited timeline to make the decision.

The reports had the same problem as in Case 1: they were built on cash basis accounting, so the real numbers were hard to measure. There was no time and no resources to fix the reporting first. But I had a ton of experience from Case 1, and that helped me make an estimation without it.

What the reports told me

1. Inventory cover could be cut in half if we changed business processes. It was mostly cheese, which can be stored for a long time. They had stocked up planning for growth, and then found themselves on a down trajectory.
2. Logistics costs could be decreased.
3. Part of the business could be reduced without harm to the profits.

What that meant for us:

1. We could free up money from the warehouse.
2. We could cut costs by optimizing business processes.
3. We had a fallback option: cut part of the business and get more cash from turnover in case something went wrong.

The seller

It was a falling market, and the seller was afraid of the losses he was generating. He would not have survived six more months of such losses.

Our plan

1. Structure the deal as an initial 20% prepayment, with all the rest paid during the year after we get control over the business.
2. Reduce inventory cover by optimizing operations, and use the money from there to pay for the deal.
3. Use this time to improve management, operations and finance. All together it was an obvious path to get above the waterline.
4. Then get the benefits of merging the existing profitable business with the giant we acquired.

How it went

Inventory cover went from 50 days to 25. The money freed up from the warehouse paid the full remaining 80% of the price. In other words, we bought the company with its own money.

We introduced delivery from the wheels: part of the goods came in during the day and were collected and delivered the same night. It required changing the rhythm of supply, re-negotiating contracts and improving how reliable our logistics were. This step added a lot of risk. If anything failed in the processes, all our biggest clients would put fines on us for failed deliveries or for goods with too little shelf life left.

During that year some of the executive team stayed, and some were replaced or let go. We never needed the fallback: in the end we only slightly optimized that part of the business and kept it.

The result

The merger brought its own savings: the same warehouse, the same office, less headcount in total, and better financial terms with the banks. The merged company is the market leader now.

My role was to structure the deal, prepare the negotiations and restructure the team in the acquired company. It was almost a two-year engagement.